Nebraska environment report favors revised Keystone XL pipe plan

WASHINGTON (Reuters) - The controversial Keystone XL oil pipeline received a boost on Friday when Nebraska regulators said its proposed new route would avoid many of the ecologically-sensitive areas that led the U.S. government to block it last year.

The new route for the $5.3 billion Alberta-to-Nebraska pipeline, backed by TransCanada Corp, would avoid the ecologically sensitive Sand Hills region but would still cross part of the massive Ogallala aquifer, the Nebraska environment regulator said.

If built, Keystone XL would link Canada's booming oil sands production with the refineries and ports of Texas' Gulf Coast, carrying some 830,000 barrels of oil per day. The project has been targeted by environmentalists concerned about carbon emissions from oil sands production and the risks posed by oil spills to water supplies in the Midwest.

The U.S. State Department is working with Nebraska as it forms its own environmental assessment of pipeline that is one piece of a continental realignment of oil flows between Canada and the United States.

Nebraska Governor Dave Heineman now has 30 days to decide whether he supports the new Keystone XL route.

The State Department has said it will soon release its environmental assessment of Keystone XL, a necessary step before the Obama administration decides the fate of the project, which is expected to be in the coming months.

President Barack Obama last year rejected TransCanada's initial Keystone XL application after environmentalists raised concerns about the Nebraska route.

Obama threw his support behind the southern half of the line, which is already under construction and would drain a glut of U.S. crude in the middle of the country caused by a surge in output from new sources in places such as North Dakota. The section does not need federal approval as it does not cross the national border.

The Nebraska report did not address concerns about the project's impact on emissions linked to global warming. Many environmentalists worry about the pipeline's emissions because oil sands petroleum is more carbon-intensive than average crude refined in the United States.

"It doesn't analyze climate impacts, it really ignores a lot of the concerns we had, just a pretty dismal presentation all around," said Peter LaFontaine, energy policy advocate at the National Wildlife Federation. Environmentalists hope the State Department assessment will consider the emissions issue.

Environmentalists and other opponents have pledged to bring a range of legal action on the pipeline over its impact on everything from wildlife to landowners. Last month a Texas judge lifted a temporary restraining order over the southern half of the line that had halted construction.

The Nebraska report also downplayed risks to the Ogallala aquifer, a crucial irrigation source for agricultural areas in the central United States, saying any leaks "should be localized and Keystone would be responsible for any cleanup."

The report also said that the Canadian oil the pipeline would carry is physically and chemically "similar to those of other light crude oils commonly transported by pipeline."

Environmentalists claim diluted bitumen, or dilbit, from the oil sands is more corrosive than other crude oils, after a series of recent pipeline spills involving Canadian crude.

RIVAL PROJECTS

As the Keystone XL deliberations drag on, rival projects are taking shape that aim to cure a deep discount on Canadian heavy crude and move growing volumes of light oil from the North Dakota Bakken region.

Enbridge Inc, already the largest transporter of Canadian oil, moving more than 2 million barrels a day, added C$600 million ($609 million) worth of new plans on Friday to a massive C$6.2 billion expansion of its system through Western Canada, North Dakota, the U.S. Midwest and Eastern Canada, announced in early December.

The company said it would spend C$400 million on its Western Canadian system to add 230,000 barrels a day of capacity, mostly by increasing the horsepower of its pumping stations between Hardisty, Alberta, and the Canada-U.S. border.

Its U.S. affiliate, Enbridge Energy Partners, will spend $200 million to further that expansion between North Dakota and Superior, Wisconsin. The capacity is scheduled to be on line in 2015, the company said.

FOUR YEARS IN THE MAKING

TransCanada first applied to build Keystone XL more than four years ago, largely to open up a major new market on the U.S. Gulf Coast for Canadian producers. In that time, production has surged across North America, resulting in discounted prices versus international crudes.

Canadian heavy blends, priced against the U.S. light oil benchmark, have been doubly hit. One Canadian heavy crude, for instance, has sold at a discount of $40 to the main U.S. benchmark, West Texas Intermediate. That has added urgency to a push by the Alberta and Canadian governments to promote new pipeline capacity.

Executives with TransCanada have said Keystone XL remains an important project for Canada and the United States, despite rival developments and a recent forecast by the International Energy Agency predicting U.S. energy self-sufficiency in the next two decades.

TransCanada on Friday said it had not yet reviewed the latest report from Nebraska.